CalPERS’ New Investment Plan – Wise or Risky?

As everyone knows – or should know – California’s huge public employee pension system is very short of the money it needs to cover all of the retirement promises made to nearly two million workers and retirees.

By its own numbers, the California Public Employees Retirement System (CalPERS) is scarcely two-thirds “funded” – and that calculation assumes that its investments will meet its projected earnings goal of 7.5 percent a year, declining slowly to 7 percent.

However, CalPERS’ own staff says that at least over the next 10 years, it can expect earnings about a percentage point lower.

Reducing CalPERS’ “unfunded liability,” or at least preventing it from growing even larger, is proving to be a painful process.

State and local governments are being hammered by ever-higher demands for mandatory “contributions” to shore up the system, with cities feeling the greatest financial pain because their police and fire personnel have the highest and most expensive benefits.

One way to alleviate the fiscal pain CalPERS is inflicting on its governmental members is to reduce its expenses and/or seek higher earnings. That’s why it is now considering a new investment strategy that would ditch private equity investment firms, whose fees have been costly and returns have been erratic, and directly buy private companies.

CalPERS officials are touting it as adopting the buy-and-hold strategy investment guru Warren Buffett has employed for decades with such obvious success.

“We’re going to own them (companies) forever rather than being forced to sell them at an arbitrary time point,” CalPERS’ chief investment officer, Ted Eliopoulos, told the Wall Street Journal.

Under the new plan, CalPERS would not only buy existing companies with positive long-term prospects but also become a source of venture capital for startups, especially in technology fields, much like the high-flying investors who fuel Silicon Valley.

“I think we are at the forefront of creating a new business model for private equity,” CalPERS board member Dana Hollinger said during a board meeting.

So what could possibly go wrong?

One need only look back a few years to the corruption scandal that enveloped the immense trust fund.

Fred Buenrostro, the former chief executive of CalPERS, went to federal prison after pleading guilty to taking more than $250,000 in cash and other bribes from his friend, former CalPERS board member Alfred Villalobos, who was attempting to steer investments to the private equity funds he represented. Villalobos committed suicide rather than go to jail.

Even when bribery was not involved, CalPERS’ dealing with private equity firms has had an unsavory taint since many specialize in taking over companies, stripping them of their assets, reducing costs by cutting jobs and then selling the corporate carcasses at a profit.

As an independent investor, would CalPERS really emulate Buffett and invest for the long run, or would it feel the need to maximize short-term earnings by emulating the corporate raiders? Would it meddle in management of its companies for other purposes, such as political correctness? And if it entered the high-flying venture capital field, would those seeking start-up funds pressure politicians to pull strings for access?

Achieving more and more stable investment earnings are worthy goals, if done the right way. Unfortunately, CalPERS’ track record is spotty at best and those making its investment decisions don’t have skin in the game themselves, as do Warren Buffett and Silicon Valley investment houses.

Unlike them, CalPERS can always sock taxpayers to cover up its bad decisions.